Why Omnichain Tokens Matter
This is part one of a series that dives DEEP into the Omnichain Fungible Token (OFT) Standard, a contract standard for developers building on LayerZero that enables applications to deploy tokens across 80+ chains. Throughout these articles, we’ll explore the OFT Standard — its characteristics, history, and future, as well as its adopters and competitors.
But first, let’s tackle the fundamental question: Why is technology that allows an asset to exist on all blockchains important in the first place?
The Problem: Liquidity Fragmentation in a Multi-Chain World
Currently, over 150 blockchains each secure more than $1 million in value, and these numbers are set to rise with Ethereum’s rollup-centric roadmap, the growing popularity of modular blockchain designs, along with the entrenchment of non-EVM chains like Solana. This chain expansion has led to a pervasive issue: liquidity fragmentation.
Liquidity fragmentation occurs because each blockchain operates independently, with its own rules, consensus mechanisms, languages, and currencies. Imagine blockchains as a collection of islands, each with its own government (DAO), language (programming language), and transportation system (gas). For residents (users) and businesses (applications) on one island, interacting with others is not only cumbersome but often impossible.
Token issuers specifically face a dilemma in terms of liquidity fragmentation: deploy an asset on a blockchain with the most liquidity or gamble on an emerging chain with potential future liquidity. The former means competing in a crowded market; the latter demands a high-risk tolerance due to new trust assumptions on nascent chains. Meanwhile, users navigate complex, risky, multi-step processes to move assets across chains, often dealing with centralized or upgradeable contracts not controlled by token issuers — heightening security risks and fragmenting the user experience.
The Solution: Omnichain Tokens
The technology now exists for assets — and their liquidity — to be universally connected across all chains while remaining under the control of token issuers.
Omnichain tokens solve asset issuance challenges and liquidity fragmentation in DeFi.
What Are Omnichain Tokens?
Omnichain tokens are issued on top of LayerZero, an interoperability protocol.
Local assets are tied to the standards of a specific blockchain, such as the ERC20 standard on Ethereum. In contrast, omnichain tokens are designed for existing natively on multiple blockchains, adhering to the messaging framework that makes up the LayerZero protocol (more info here).
This means any asset — fungible or non-fungible, old or new — can become an omnichain token, gaining each chain's technological benefits and network effects. This offers an improved experience for users, developers, and, most importantly, token issuers, characterized by:
- Unified Liquidity: Token issuers can track and maintain a global supply of omnichain tokens through a single interface.
- Capital Efficiency: Transfers require only gas costs plus verification, eliminating the need for liquidity pools or complex mechanisms and enabling consistent, slippage-free transfers across chains.
- Unified Semantics: Omnichain tokens can be sent and composed across chains seamlessly.
- Network Effects: Token issuers can extend assets to chains quickly as soon as narratives arise.
How Omnichain Tokens Work
LayerZero enables the transfer of arbitrary data between chains. An asset, or omnichain token, is just one type of data that can be moved between chains.
Understanding the Process: Accounting Theory
Omnichain asset transfers are a matter of accounting — using locks, burns, and mints as digital equivalents of debits and credits, tracked across blockchains by LayerZero (and, therefore, token issuers) to prevent double-spending and ensure a stable global supply. In reality, the thing being sent between chains is not necessarily a token but a message telling the token issuer that supply is being shifted from Chain A to Chain B.
There are two primary methods for moving omnichain tokens between chains:
- Burn-and-Mint (New Assets): For new tokens launched as omnichain tokens, the asset is burned on the source chain and minted on the destination chain when transferred, keeping the total supply constant across networks. This burn-and-mint transfer flow remains the same across each chain the token issuer chooses to deploy an omni asset.
- Lock-and-Mint (Existing Assets): Existing assets distributed on a single blockchain can be transformed into omnichain tokens by locking them in a contract on the source chain and minting them on the destination chain. The process reverses when returning to the source chain.
For local assets that want to extend to multiple destination chains, the process is also quite simple: an extension token contract is deployed on chain A. When that asset is transferred from chain A to B, it is locked into that contract on chain A and minted to chain B. Transferring the asset to chain C results in a burn event on chain B and mint on chain C. When a user returns to chain A from chain C, the asset is burned and unlocked from the extension token contract.
Why Omnichain Tokens Matter
Crypto operates in a multi-chain, multi-hub economy, much like the world functions as a multi-state, multi-nation economy.
Having an asset confined to one chain is like an asset trapped in one country — isolated and limited.
Omnichain tokens offer a way for asset issuers to build in the crypto space without immediately fragmenting their liquidity. With LayerZero, a token can be deployed to as many as 83 chains — including Ethereum, Solana, or Arbitrum — or as few as two chains, depending on the asset issuer’s strategy.
This enables token issuers to extend an asset to new chains for any reason, be it social (popularity), technical (high TPS), or business (partnerships). For end-holders, omnichain tokens power seamless, cheap transfers between chains.
The impact of omnichain tokens goes beyond solving just token issuance and liquidity fragmentation in DeFi. Omnichain tokens have the potential to make a significant impact in the broader world. For example, cross-border transactions are fraught with intermediaries, fees, and delays. In crypto and with LayerZero, omnichain tokens eliminate these barriers, providing a unified, composable, and interoperable way for value/assets to exist.
An example of the power of an omnichain token on LayerZero is weETH, an ETH-pegged, yield-bearing asset. weETH is interoperable across 8 chains, taking ETH restaking yield from Ethereum and making it available on other blockchains. This contrasts to the walled garden “real world,” where, for example, US dollars cannot interoperate easily between different fintech payment apps.
Composability and interoperability across many execution environments and ledger types are major upgrades for end users and token issuers — and is a net upgrade over what exists in the “real world” in many cases.
Omnichain tokens offer asset issuers and holders near-instant, secure, and low-cost transfers worldwide, allowing value to move as freely as data on the Internet. They eliminate walled gardens and streamline asset movement; they are programmable money on steroids — perhaps one of the most powerful tools to emerge from the crypto industry.
Conclusion
Omnichain tokens exist everywhere, all at once. In an industry rapidly expanding with L2s, modular blockchains, and L3s, omnichain tokens solve liquidity fragmentation. Instead of siloed tokens on isolated chains, omnichain tokens offer a unified approach, allowing a single token to operate across many chains.
As more blockchains emerge, omnichain tokens issued on LayerZero will become increasingly vital. Making tokens more accessible and widely used is crucial for long-term success, and that’s why we believe omnichain tokens are the ultimate evolution of asset issuance in crypto — and perhaps finance in general.
Stay tuned for our next article, where we’ll explore all the different variations of assets that have used LayerZero for token issuance.
For more on LayerZero, check out the…
For additional information on the OFT Standard…
- Technical documentation on deploying OFT Standard contracts
- High-level explanation of the OFT Standard, including adoption metrics.
